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Last year the Governor and the California Legislature took action to wind down the California Enterprise Zone Program beginning in 2014. EZ Credits can still be claimed on 2013 and amended in the four prior years, and employers can continue to claim hiring credits through 2018 on qualified employees hired priro to 2014.

As a replacement for the EZ program, various incentives, including the California Competes Credit Program (“CC Credit”) has been initiated. The CC Credit requires taxpayers to subit detailed information to Scaramento for evalauation and consideration for a pool of credits (discussed below). 25% of the credits will be earmarked for Small Businesses – defined as those with less than $2M of gross revenues.

The The California Governor’s Office of Business and Economic Development (GO-Biz) has been conducting educational sessions concerning the California Competes Tax Credit throughout Southern California this week. Many local businesses and practitioners have attended the meetings. . The ideal taxpayer profiles are as follows:

Planning to add headcount in California any time between 2014 through 2018 in excess of 2013 FTEs and/or

Planning to make capital expenditures in California any time between 2014 – 2018

About the Credit

The CC Credit is a negotiated income tax credit available to businesses that want to stay and grow or want to come to California. Tax credit agreements will be negotiated by GO-Biz and approved by a newly created “California Competes Tax Credit Committee,” consisting of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, one appointee from the Senate, and one appointee of the Assembly. Credits have a carry-forward provision of 6 years.

Amount of Credits Available

California has a fiscal year that runs from July 1 – June 30. The amount of CC credits by fiscal year budgeted by the Governor under the Go-Biz program are as follows:

Fiscal Year 2013/2014 – $30M

Fiscal Year 2014/2015 – $150M

Fiscal Year 2015/2016 – $200M

Fiscal Year 2016/2017 – $200M

Fiscal Year 2017 /2018 – $200M

What To Do?

Apply immediatley for the current round of tax incentives

Evalaute other existing state and federal incentives

Discuss and understand your growth plans between now and 2018.

Why Now?

You want clients to hear from you rather than our competitors

Application for fiscal year 2013/2014 closes on April 14. It may be strategically better to submit application for the fiscal year 2014/2015. The application period for 2014/2015 should open after July 1, 2014.

HCVT has significant experience in identifying and documenting various federal, state and local tax incentives and we have deep connections within the economic development community.

We can assist you in presenting your project to maximize your probability of securing some of the avaialble tax incentives.

Although somewhat limited in it’s application, the California gain exlusion for Qualified Small Business Stock (QSBS) has been retroactively reinstated back to 2008. See IRC Section 1202 for details regardinng QSBS eligibility.

See www.hcvt.com for additional planning ideas or call (562) 216-1800.

In addition to deflecting requests for money from every person they have ever met (and many who they have never met), they will have some “good” problems to deal with like – taxes, investment options, insurance protection and ensuring their after-tax funds outlive them. Unfortunately there are more financial horror stories about looery winners than happy endings – mainly attributable to the fact winners seldom have any experience handling even moderate sums of money.

Before claiming their prizes, I recommend that they have some in-depth conversations with a qualified attorney, CPA and investment advisor (best if all are in the same room – and are not a relative).

The most pressing issues are:

1) Can I retain my annonimity?

2) Am I a solo winner, or are there other family members and/ or friends/ co-workers that are entitled to a portion of the winnings (and the related taxes)?

3)) Should I take a lump-sum or installments?

The first issue will be dictated by each winner’s state of residence. In some cases, the winner can claim the prize through a trust or another legal entity and might be able to stay inder the radar – for at least a short period of time.

The second issue neeeds to be fully vetted before claiming the prize. There are numerous, and significant income, gift and estate tax advantages of splitting the winnings amongst various family members, if you have established a verbal agreement prior to winning the game. For example, if a wife bought a $10 ticket and prior to the drawing announced she was sharing any winnings with her husband and 3 children, there is a good case that she made a gift of a a portion of the ticket ($2 to each family member), and the taxability would now be split 5 ways (ignoring joint filing with her husband). Since we have a graduated tax system, the savings can be dramatic – especially if they take installment payments – thereby gaining rate beenfits each year for the first couple of hundred thousand dollars of winnings. Splitting the proceeds up front also saves massive amounts of gift tax and estate taxes which would get triggered if a winner moves funds to family members or friends after they claim the prize.

The final and somewhat complex decision is whether to take a lump-sum or installments. As previously mentioned, installments allow multiple years of lower taxes on the first $200,000 of winnings/ income, before hitting the maximum tax rates which can be as high as 43.4% for federal alone after $200,000 of taxable income. Installmants also allow multi-year tax planning, which is not possible if a lump-sum is claimed. The installment approach can allow winners to still access future payments through deferred-taxable private loans or specialty companies that will purchase deferred installments at a discount.

With amounts as large as the current prize ($149M pre-tax each for the three winners), I highly recommend installments for the reasons above and as further discussed in my prior blog post:

It is being reported that the Minnesotta winner is claiming a lump-sum prize which will only leave him with about $54M (about 1/3 of the gross under the installment method) – not a good % by my calcs……

While the California Governor and Legislature have effectively dismantled the last economic development tool avaialble to cities and small businesses, the current EZ program can still generate valuable refunds and future credits for businesses that document their eligible employees and assets. Action must be taken before year-end to maximize credits.

Since another local person won a good sized prize – it is worth reviewing the link above.

Larger prizes almost always support taking the winnings in installments since taxpayers will get graduated tax rates, personal exemptions and itemized deductions shaved off their taxable income over the entire installment period (vs. just one year).

It is also important to fully evaluate who the actual owners of the ticket are. The purchaser? Other family members? Friends? Co-workers? The tax difference when the income is spread over multiple winners can be significant — and is much better than one person claiming the prize and then gifting a portion to others who may have a partial claim.

California’s Housing & Community Development (HCD) Department runs the statewide EZ program which includes 42 California cities. They have proposed changes to the employee vouchering process, which will significantly complicate getting certifications from cities to confirm that an employee is eligible to earn credits for the employer. Virtually all the qualified businesses operate in the most economically challenged areas of the state and hire large numbers of inner-city employees — who are also typically economically challenged.

These changes are still under review, but are expected to be released in June of 2013.

California’s tax rate hit 9.3% fairly quickly and climb as high as 13.3% — the highest in the country. These EZ Program credits are necessary to give taxpayers a relatively small tax reduction compared to other states.

Trends in technology and increased availability of information have placed a spotlight on corporate and individual taxpayer compliance and financial stewardship.

March 28, 2013 by Blake E. Christian, CPA/ MBT

Last month I attended the annual University of Southern California Gould School of Law Tax Institute conference. As usual, the quality of the presenters, as well as the technical content, was exceptionally high.

While there were plenty of presentations covering the American Taxpayer Relief Act (ATRA) of 2012, P.L. 112-240, a few notable presentations covered some interesting trends and predictions relevant to business taxpayers.

Following is a summary of a few tax trends and policy discussions:

Technology and tax transparency (Click the link for the full article):